UNIT 4: STRATEGIC MANAGEMENT

Content
• Business Strategy and Strategic Position
• Competitive Strategies
– Differentiation
• Understanding the value drivers
– Cost Leadership
• Understanding cost drivers
– Benefits and Risks of Cost-Leadership and Differentiation Business Strategies
– IntegrationStrategy

How to Compete for Advantage?

• Business-level strategy details the goal-directed actions managers take in their quest for
competitive advantage when competing in a single market.
• To formulate an appropriate business-level strategy, managers must answer the
“who-what-why-and-how” questions of competition:
• Who—which customer segments—will we serve?
• What customer needs, wishes, and desires will we satisfy?
• Why do we want to satisfy them?
• How will we satisfy our customers’ needs?

Business Strategy and Strategic Position

• Managers can achieve competitive advantage by:
– Performing similar activities differently, or
– Performing different activities than their rivals that result in creating more value or
– Offering similar products or services at lower cost.
• At the firm level, performance is determined by value and cost positions relative to
competitors.

Industry and Firm Effects Jointly

Determine Competitive Advantage

COMPETITIVE STRATEGIES
Strategic Position and Competitive
Scope: Generic Business Strategies
Market for wristwatches: Rolex and Timex
• Rolex follows a differentiation strategy: It creates a higher value for its watches by making
higher-quality timepieces with unique features that last a lifetime and that bestow a
perception of prestige and status upon their owners. Customers are willing to pay a steep
premium for these attributes.
• Timex follows a cost-leadership strategy: It uses lower-cost inputs and efficiently produces
a wristwatch of acceptable quality, highlights reliability and accuracy, and prices its
timepieces at the low end of the market.

Tesla Motors
• Tesla started offering a highly differentiated product and pursuing only a small market
segment. It used a focused differentiation strategy.
• Tesla was targeting environmentally conscious consumers that are willing to pay a premium
price.
• “The strategy of Tesla is to enter at the high end of the market, where customers are
prepared to pay a premium, and then drive down market as fast as possible to higher unit
volume and lower prices with each successive model.” (www.tesla.com, 2022)

DIFFERENTIATION STRATEGY

A company that uses a differentiation strategy can achieve a competitive advantage if its
economic value created (V - C) is greater than that of its competitors.

Hospitality Company
• Marriott leverages its differentiated appeal of superior customer service
and quality:

• Marriott hotels generally offer a higher perceived value.

• This difference between price and value allows Marriott to gain market
share and post superior performance.

Identifying Differentiation Potential:

The Demand Side

Using the value chain to identify differentiation potential on the supply side
Most salient value drivers to improve a
firm’s strategic position
How can firms following a differentiation strategy increase consumers
perception of value that their competitors cannot easily match?
Managers should pay attention on:
- Product features
- Customer service
- Complements
• These value drivers are related to a firm’s expertise in different internal
value chain activities.

Product features
• Strong R&D capabilities are oHen needed to create superior product features.
• BMW has a strong reputation for superior engineering, built through decades of continued
R&D investments. The high-performance capabilities of its models also come with a
premium price.
• In the kitchen-utensil industry, OXO, by following its “philosophy of making products that
are easy to use for the widest spectrum of possible users,” OXO differentiates its kitchen
utensils through its patent-protected ergonomically designed soW black rubber grips.

Customer Service
• The online retailer Zappos earned a reputation for superior customer service by offering
free shipping both ways: to the customer and for returns.
• Zappos did not outsource its customer service.
• Amazon bought Zappos for over $1 billion.
• Following its mission, “We are Ladies and Gentlemen serving Ladies and Gentlemen,” the
Ritz-Carlton has become one of the world’s leaders in providing a personalized customer
experience based on sophisticated analysis of data gathered about each guest, including
past choices.

Complements
• Complements add value to a product or service when they are consumed
in tandem.

COST-LEADERSHIP STRATEGY
Cost-Leadership Strategy:
Achieving Competitive Advantage

Value chain analysis of cost advantage

• Disaggregate the firm into separate adviSes
• Establish the relaTIve importance of different adviSes with respect to the total cost of the
product
• Identify cost drivers and linkages within the value chain
• Identify opportuniTIes for reducing costs.

Cost-Leadership Strategy:
Understanding Cost Drivers
• The cost leader focus on optimizing all the value chain activities to achieve
a low-cost position, but it still needs to offer products and services of
aceptable value.
• The most important cost drivers that managers can manipulate to keep
their costs low are:
– Cost of input factors
– Economies of scale
– Learning-curve effects
– Experience-curve effects

Cost of Input factors

• Raw materials. How? Find new suppliers?
• Capital. New financial institutions?
• Labor. Outsource certain activities to emerging countries?
• IT services. Change suppliers?
The company sGll needs to offer products and services of acceptable value.
Economies of Scale
• Firms with greater market share might be able to reap economies of scale,
decreases in cost per unit as output increases

Economies of Scale Allow Firms to:

Spread Fixed Costs over Larger Output
• Gains in market share are often critical to drive down per-unit cost.
• Microsoft spends $ billions on R&D, a significant portion of it on each new Windows
operating system.
• Once the new Windows version is completed, the marginal cost of each additional copy is
basically zero.

Economies of Scale Allow Firms to:

Employ Specialized Systems and Equipment
• Investments in more specialized systems and equipment
– Enterprise resource planning (ERP) software or manufacturing robots.
• GM introduced the Chevy Volt in 2011, its first plug-in hybrid vehicle. It was priced at about
$40,000, almost twice as expensive as a Toyota Prius. Yet GM was counting on selling the
Chevy Volt in large numbers so that specialized robotics equipment could be employed in a
cost-effective fashion. This in turn should drive down production costs and allow GM to lower
the price for the Chevy Volt.

Economies of Scale Allow Firms to:

Take Advantage of Certain Physical Properties.
• This principle makes big-box retail stores such as Walmart and the Home Depot cheaper to
build and run.
• They can stock much more merchandise and handle inventory more efficiently. Their huge
size makes it difficult for department stores or small retailers to compete on cost and
selection.

Cost-drivers:
Learning and Experience Curve effects
• Learning by doing can also drive down cost.
• An experience curve attempts to capture both learning effects and process improvements.
Gaining Competitive Advantage Through Leveraging Learning- and Experience-Curve
Effects:

Important differences between economies of scale and learning effects

• Learning effects occur over time as output is accumulated, while economies of scale are
captured at one point in time when output is increased. Although learning declines at some
point, there are no diseconomies to learning.
• In some production processes (e.g., a simple one-step process in the manufacture of steel
rods), effects from economies of scale can be quite significant, while learning effects are
minimal.
• In some professions (e.g., brain surgery), learning effects can be substantial, while
economies of scale are minimal.
• If a firm’s cost advantage is due to economies of scale, a manager should be more
concerned with drops in production runs.
• If the firm’s low-cost position is based on complex learning, managers should be much
more concerned if a key employee (e.g., a star researcher at a pharmaceutical company)
was to leave.

Competitive Positioning and the Five Forces: Benefits and Risks

of Cost-Leadership and Differentiation Business Strategies
INTEGRATION STRATEGY
General Motors
• GM’s mission: providing a car for every purse and purpose.
• GM implemented a multidivisional structure to separate the brands into strategic business
units, allowing each brand to create its unique strategic position within the broad automotive
market.
• In 2010s, GM product lineup ranged from the low-cost-positioned Chevy Spark, starting at
a price of $12,000, to the highly differentiated Cadillac Escalade SUV priced at $74,000.

Integration Strategy: Combining Cost

Leadership and Differentiation
• Managers should not pursue this complex strategy unless they are able to reconcile the
conflicting requirements of each generic strategy.
• A cost leader would focus R&D on process technologies in order to improve efficiency.
• A differenGator would focus R&D on product technologies in order to add uniqueness.

Integration Strategy vs. “Stuck in the Middle”

Target’s Attempt at Achieving Competitive
Advantage by Pursuing an Integration Strategy

Target almost achieves cost parity with Walmart. At the same time, Target outdoes
Walmart in product selection, merchandising, and store layout so that its stores offer
a higher-quality shopping experience for the customer.

Value and Cost Drivers of Integration Strategy

• Quality
• Economies of scope
• Customization
• InnovaSon
• Structure, culture, and rouSnes
• These value and cost drivers are interdependent.
Quality
• The quality of a product denotes its durability and reliability.
• Through techniques such as total quality management, companies design and build
products with quality in mind, while increasing their differentiated appeal. By building in
better quality, companies reduce the after-sale service requirements.
• Quality is a two-pronged activity: It raises economic value creation (V - C) by
simultaneously increasing V and lowering C.

Economies of Scope
• The savings that come from producing two (or more) outputs at less cost than producing
each output individually, even though using the same resources and technology.
• Starbucks, for example, is already set up to boil purified water for its hot coffee beverages;
thus, it reaps economies of scope when it offers tea in addition to coffee.
• Starbucks lowers its cost structure by sharing its production assets over multiple outputs,
while increasing its menu and thus its differentiated appeal.

Customization
• Customization features to tailoring products and services for specific customers.
• Advances in manufacturing and information technology have made feasible mass
customization—the manufacture of a large variety of customized products or services done
at a relatively low unit cost.
• What is the difference between customization and differentiation?

Innovation
• Innovation is frequently required to resolve existing trade-offs when companies pursue an
integration strategy.
• Broadly defined, innovation describes any new product and process, or any modification of
existing ones.
• Is Apple still innovative?

Structure, Culture and Routines

• The goal for managers who want to pursue an integration strategy should be to build an
ambidextrous organization.
• Ambidexterity describes a firm’s ability to address trade-offs not only at one point but also
over time. It encourages managers to balance exploitation (applying current knowledge to
enhance firm performance in the short term) with exploration (searching for new knowledge
that may enhance a firm’s future performance).
• Intel focuses on maximizing sales from its current cutting-edge microprocessors, while it
also has several different teams with different time horizons working on future generations of
microprocessors.

The Dynamics of Competitive

Positioning: The PC Industry